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China’s Evolving Web

A market economy can be understood as a web of public and private contracts that are linked with each other, with one default potentially triggering an avalanche of broken promises. To understand China’s socialist market economy, it is essential to examine these different forms of contracts and their institutional structures.

HONG KONG – In a recent article, the economist Axel Leijonhufvud defines the market system as a web of contracts. Because contracts are linked with each other, one default can trigger an avalanche of broken promises, “[making] it possible to destroy virtually the entire web of formal and informal contracts which the market system requires for its functioning.” The state’s role is to protect, enforce, and regulate these contracts and related property rights, as well as to intervene to prevent systemic failure.

This web of contracts – often taken for granted in mainstream economics, to the extent that it becomes almost invisible – embodies the formal and informal rules embedded in the market system that shape and constrain individual and social behavior. They form the fabric of all human institutions.

Advanced economic systems have very complex webs of contracts, such as financial derivatives. For Europe, Leijonhufvud argues, this implies a three-pronged approach that focuses on “levels of leverage,” “maturity mismatches,” and “the topology of the web,” – that is, “its connectivity and the presence of critical nodes that are ‘too big to fail.’” This is because “[t]he web of contracts has developed serious inconsistencies.” To insist that all contracts be fulfilled would “cause a collapse of very large portions of the web,” with “serious economic and incalculable social and political consequences.”

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Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission, and is currently an adjunct professor at Tsinghua University in Beijing. His latest book is From Asian to Global Financial Crisis.

The obvious correlation that may be cited in the article is the correspondence between information networks and social or business networks. But it seems, apart from a metaphor, these similarities are not bridged. There is a big difference between entities in an informational sense and entities in a cultural, social, or ambitious sense. Perhaps China's development is underwritten by a virtue such as public service or intelligence, but this is not made explicit in the article.

How can business infrastructure resemble information functioning is a question that obviously businesses must face consistently. Yet, how much innovation is actually achieved in the information field, at a symbolic level? Should it be necessary to say that information-infrastructure development is un-symbolic? This would be like saying that economies are forged at the whim of some brute natural force, which I sense is not exactly what is being argued, defended, or put forth. What does it mean to have an economy that is shaped by symbolic forces? Perhaps this question would seem ridiculous to most businessmen and financiers or government officials, because they feel that they are above the subjectivity of the common opinion, and the common perspective, or the 'weak forces' which form the basis of simple (social) contracts and so on.

Surely there is no 'magical force' which dictates that a business or institution must operate symbolically. Yet under a concept of kinetic information, and fair representation---aspects which subtly relate to economics, perhaps currently under no distinct umbrella of support---the nature of the modular citizen seems to be represented here, as an element of infrastructure and even information architecture. How does the individual gain symbolic representation in the economy? From my point of view, it seems that such a description or embodiment might be derived in some way from what you describe, or some local-scale variation, maybe an economic application, or some reflection of economics in the structure of informational computing. I will leave it at loose ends---perhaps economics relates to the structure of the citizen, and government and economics of some description should be biased to favor personal development. Some would assume this is already implemented---but it seems to me that somehow, in some way, citizens are not being treated as information.

A very stimulating article on creation of a web of contracts that also directs us towards how an institutional framework could be created around Innovation and I am infuenced by two papers as follows:

The first is the Research paper: "China's innovation policies: Evolution, institutional structure, and trajectory", which gives a vivid detail of how China emerged into a leading player on innovation in the area of Science and Technology and the second the book, ‘Dragon at the Door’, is one other example how it has gone beyond the institutional framework to adopt innovative practices which even the Western nations could emulate.

It is worthwhile to go through the 287 policies issued by the China’s central government agencies between 1980 to 2005 and 79 policies introduced thereafter which include financial, tax and fiscal measures to incentivize innovation. One of the fundamental observation has been the widening of focus from universities and technological institutions to all sectors of the economy that enhanced the creation and commercialization of new products and processes and services in economic activities. The top down trial and error through which the framework had moved laid down the foundation of the National Innovation System that had one single aim of moving from competitiveness to all round social welfare. It is truly a great learning for all how a State led centrally orchestrated policy making institutional framework could be created that went through a series of evolutions that encompassed all the constituents of a well crafted innovation framework that includes Science and Technology investment, tax stimulus, financial support, government procurement, talent, IPR creation and protection, education and S&T popularization, building of bases and platforms for S&T and innovation coordination.

When we are talking of web, as in this article it is worthwhile to note how a market based system (the fundamental requirement for innovation to thrive in an economy) could evolve from within the centrally controlled system of governance where the only suffrage is limited to universal direct election at the village level.